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China's Economic Might Makes Japan Nervous

China has become the world's number three trading power, behind the United States and Germany. It reported 35-percent growth in foreign trade in 2004, and with its economy on a roll and its refusal to let its currency rise in value, trade growth is likely to stay in double digits for some time. That makes many people in Japan nervous.

China's gain has been Japan's loss. China's trade surplus with the United States is running at about $150 billion a year according to estimates by several U.S. trade experts. It is now the United States' fourth-largest trading partner, behind Canada, the European Union and Mexico - and ahead of Japan.

But there is an upside for Japan to China's economic boom. Improved infrastructure and a desire for foreign direct investment in China have prompted Japanese companies to move factories there - lowering their labor costs and allowing them to stay competitive.

The rising tide of Chinese exports to Japan, however, is causing concern here. Japanese officials accuse China of dumping some products in Japan - the type of accusations Washington used to lob at Tokyo in the 1980s and 1990s.

But the chief economist of the Tokyo branch of HSBC Securities, Peter Morgan, says Japan should think twice about fretting over imports of such things as cheap Chinese spring onions, shiitake mushrooms or bath towels.

"These sorts of trade spats are basically symbolic and don't really have material effect on the overall trade relationship," he said. "One of the things the Chinese did when the Japanese put on these trade restrictions is to say 'OK, we'll restrict your car exports to China' and hit them where it hurts. It's very much of a two-edged sword."

While China easily beats Japan when it comes to labor costs, the world's most populous country still lacks competitive technology.

Professor Xu Peng, at the Institute of Comparative Economic Studies at Tokyo's Hosei University, says that means Japanese products will remain competitive for a long time, until China improves its technological capabilities.

"Of course, many Chinese companies, they still copy products like automobiles from Western companies. I think that in technology, Western companies, including Japanese companies, still have very, very strong comparative advantages," he said. "It's the main problem [for China], how to build its brand names and how to develop its new technology."

Japan cannot complain too loudly. China has become Japan's second-largest export market behind the United States, and the HSBC economist, Mr. Morgan, says the opportunities presented by the China market have muted much of Tokyo's displeasure with Beijing. "Having seen the dramatically strong growth of Japanese exports to China over the past couple of years, I think that attitude has really changed in that it is seen much more as an opportunity rather than necessarily a direct threat," he said.

With China entering its third year as a member of the World Trade Organization, it is under increasing pressure to crack down on the piracy of intellectual property and violations of foreign patents. Japanese, U.S. and European companies say rampant piracy - whether the items are sold abroad or sold at home in place of the genuine article - adds to China's expanding trade surplus and robs them of revenue.